Questar Corporation (STR)

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Questar (STR)

Q4 2012 Earnings Call

February 21, 2013 9:30 am ET

Executives

Kevin W. Hadlock - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Ronald W. Jibson - Chairman, Chief Executive Officer, President, Chief Executive Officer of Questar Gas Company, Chief Executive Officer of Wexpro, President of Questar Gas Company and President of Wexpro

R. Allan Bradley - Executive Vice President, Chief Executive Officer of Questar Pipeline and President of Questar Pipeline

Craig C. Wagstaff - Executive Vice President and Chief Operating Officer of Questar Gas

Analysts

Timm Schneider - Citigroup Inc, Research Division

Kevin A. Smith - Raymond James & Associates, Inc., Research Division

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Christopher P. Sighinolfi - UBS Investment Bank, Research Division

Presentation

Operator

Good morning. My name is Jeremy. I will be your conference operator today. At this time, I would like to welcome everyone to the Year-End 2012 Earnings Conference Call. [Operator Instructions] Thank you.

Kevin Hadlock, Executive Vice President and CFO of Questar Corp., you may begin your conference.

Kevin W. Hadlock

Thank you, Jeremy. Good morning, everyone, and thank you for joining us for Questar's Full Year 2012 Earnings Conference Call. I am Kevin Hadlock, Questar's Chief Financial Officer. With me today are Ron Jibson, Chairman, President and CEO of Questar Corporation; Jim Livsey, Executive Vice President and COO of Wexpro; Allan Bradley, President and CEO of Questar Pipeline; and Craig Wagstaff, Executive Vice President and COO of Questar Gas.

During this call, we will be referring to our full year 2012 earnings presentation that can be found on our website at www.questar.com.

Moving to Slide 2. Before we begin, let me remind you that we will be making forward-looking statements during our call today, and actual results could differ from our estimates for a variety of reasons that we described in our SEC filings. Also, this call may reference non-GAAP financial measures. Our slides in the appendix of the presentation provides reconciliations to these measures.

Let's begin with a review of the full year on Slide 4. Yesterday, we reported full year 2012 net income of $212 million or $1.19 per diluted share. These results compared to net income of $207.9 million or $1.16 per diluted share in 2011.

Excluding the retirement incentive charge taken in the fourth quarter, adjusted net income was $215 million or $1.21 per diluted share. Operating cash flow was strong in 2012, totaling $525.8 million, an increase of about 9% compared to 2011.

On a consolidated basis, Questar's return on equity was 20.8%, excluding the retirement incentive charge. Capital investment for 2012 was $370.7 million, an increase of about 1% compared to the prior year.

We spent $92.3 million under our $100 million share repurchase program, achieving our target of 175 million common shares outstanding. The average purchase price was $19.95 per share, which compares favorably to recent trading levels.

Turning to Slide 5. All business units performed very well, with Questar Gas and Wexpro earning record net income in 2012. Consolidated net income was up $4.1 million or $0.03 per share versus 2011.

Moving to Slide 6. Questar Gas, our retail gas distribution utility, had an increase in gross margin to $328.9 million. Adjusted EBITDA was higher by $4 million and net income was up by $1 million compared to 2011. This increase was due to higher recovery of feeder-line replacement investment and customer growth, partially offset by increased employee-related and other costs.

Questar Gas' capital investment in 2012 was $162.1 million, an increase of $40.6 million over 2011, driven primarily by spending on system reinforcement and customer growth.

Turning to Slide 7. Wexpro, our cost-of-service natural gas development company, grew adjusted EBITDA to $236.1 million, up $22.2 million or about 10%, compared to 2011. Net income was up $8.7 million to $103.9 million, an increase of 9% over the prior year. These results were driven largely by a higher 12-month average investment base, which increased $58.1 million or nearly 13%.

Wexpro invested capital of $144.5 million in 2012, up $8.3 million compared to 2011.

Moving to Slide 8. Revenue at Questar pipeline, our interstate natural gas pipeline and storage business, was about $5.7 million in 2012, primarily due to gas received from Clay Basin customers to settle the shortfall between liquid revenues and the cost of conditioning gas. These additional revenues were partially offset by lower transportation and natural gas liquids revenues. Adjusted EBITDA was slightly lower due to the higher employee-related costs.

Questar pipeline earned net income of $64.7 million, down $3.2 million versus 2011, due to the higher interest cost and increased depreciation expense, partially offset by gains from asset sales.

Capital investment in 2012 was $60.6 million, which was $43.9 million lower than the prior year. This reflects the completion of several key projects in 2011.

Moving to Slide 9. With regard to cost, Questar's 2012 consolidated operating and maintenance costs were up $4.9 million compared to 2011, due largely to higher water disposal cost at Wexpro and higher well workover expenses at Wexpro and Questar pipeline.

General and administrative expenses were up by $2.9 million, primarily due to higher employee-related costs.

During the fourth quarter, we recognized $4.9 million in retirement incentive cost, which should reduce our ongoing employee-related expenses.

Reduction and other taxes were $4.6 million lower due to lower natural gas prices, partially offset by higher production volumes. Depreciation in 2012 was up $21.9 million -- sorry, $21.7 million compared to 2011, due to higher capital investments. Consolidated interest expense was $1.1 million higher as we replaced short-term borrowings with long-term debt.

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